Re-examination of the banking window dressing theory

Abstract

Purpose – The purpose of this paper is to re-examine in detail the banking window dressing (WD) theory. Using data from the Greek banking industry during the euro period (2001-2013), the results suggest that there are signs of upward assets and deposits WD. Moreover, it tries to explain, using new-alternative approaches, the incentives for the WD and how the deposits WD occur. Design/methodology/approach – To examine why bank managers upwardly WD the deposits and which strategy increases the regular payments cost, the author uses a Granger causality procedure and confirms the theory that the aim of increased assets report causes the deposits WD. Moreover, using a GARCH(1,1) and a methodological approach that is usually used in calendar anomalies, but is more flexible than the one usually applied, enables us not only to confirm that there is a WD but also under which mechanisms it occurs. Findings – Bank managers prefer to pay increased regular payments due to the upward deposits WD to upwardly WD the bank assets, for the following reasons: they receive compensation depending on the assets’ volume, they gain prestige and most managers try to present increased bank assets and deposits to include them in the “too big to fail ” (TBTF) regime. The author also finds that managers increase the new offered bank premiums in the quarters’ end to attract more deposits, and in this way, the deposits WD occurs. Research limitations/implications – The findings of this study are limited to the Greek case, but the methodological approach may be applied to other cases to examine the WD theory and it could present a new-flexible way for WD research. Practical implications – Examining the institutional framework, the theoretical background and the results, the author may suggest that reforms, at least in the way that the regular payment to the Greek deposits insurer are paid, should be applied. In Greece, 80 per cent of the regular DIS payments are deposited in the same financial institution. This reduction of the ratio significantly increase the deposits WD cost. Originality/value – The contribution of this paper is to re-examine the WD theory and to suggest new and more flexible methodological approaches. Moreover, this is the first study that examines the WD for the Greek case.